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The Global Implications of Falling Commodity Prices

Aug 27, 2013José Antonio Ocampo
, Bilge Erten
China's growth slowdown has serious implications for the convergence of developed and developing countries’ per capita income levels. Just as China’s economic boom benefited commodity-dependent developing countries, its slowdown – and the concomitant commodity-price downswing – is undermining their economic growth and development.

NEW YORK – The decade-long commodity-price boom has come to an end, with serious implications for global GDP growth. And, although economic patterns do not reproduce themselves exactly, the end of the upward phase of the commodity super-cycle that the world has experienced since the early 2000’s dims developing countries’ prospects for continued rapid catch-up to advanced-country income levels.

Over the year ending in July, The Economist’s commodity-price index fell by 16.5% in dollar terms (22.4% in euros) with metal prices falling for more than two years since peaking in early 2011. While food prices initially showed greater resilience, they have fallen more sharply than those of other commodities over the past year. Only oil prices remain high (though volatile), no doubt influenced by the complex political events in the Middle East.

In historical terms, this is not surprising, as our research into commodity super-cycles shows. Since the late nineteenth century, commodity prices have undergone three long-term cycles and the upward phase of a fourth, driven primarily by changes in global demand. The first two cycles were relatively long (almost four decades), but the third was shorter (28 years).

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José Antonio Ocampo is a board member of Banco de la República, Colombia's central bank, professor at Columbia University, and Chair of the UN Economic and Social Council’s Committee for Development Policy. He was Minister of Finance of Colombia and United Nations Under-Secretary-General for Economic and Social Affairs. He is the co-author (with Luis Bértola) of The Economic Development of Latin America since Independence.

Rising prices attract a flurry of capital, lowering of prices makes a capital flight; but where would it go with more and more getting released from Central Banks. The short term problem is enormous with global commodities making the entire economies that depend on commodities to suffer greatly as no fresh investment is getting announced while those that have been are moth-balled. The cascade effect runs all through to the energy and power sector, which in any case is a fit case for qualifying as a non-performing asset, wherever it is.

In addition to China and BRICs demand, under WTO, the fundamental factor involved in global commodity trade has been Feds (false!) policy decision to allow (former shadow) banks to horde commodities for their trading leverage including metals and crude oil - under CFTCs nose.

When these anomalies are finally corrected by Fed and CFTC there is good chance we shall return to normality both in terms of unit prices and actual volume demands.